All pricing is indicative and based off spot AUD/EUR 0.6980. The four (4) month FEC (Foreign Exchange Forward contract) is 0.6910 (spot of 0.6980 less 70 forward points).

Expiry Date: 2015-01-14 (four months) Value Date: 2015-01-16 Strike 1: 0.6910 (at-the-money fwd) Strike 2: 0.6860 (50 pips out-of-the-money (OTM)) Premium 1 2.13% of AUD face value (~146 AUD/EUR pips) Premium 2: 1.81% of AUD face value (~124 AUD/EUR pips)

Consider the two options (call on Euro) proposed to the company above. The company is an Australian importer (has AUD, needs to buy Euro).

*You need to adjust the premium so that it is a premium for each contract on one unit of Euro. For example, the premium for the first option is 2.13% of the AUD face value. This means that the premium is 2.13% * 1.4472 =3.08% of the Euro face value (rounded to the second decimal).

A. Calculate their exercise price (rounded to the fourth decimal) (5), their premium (expressed as a percentage of the Euro face value rounded to the second decimal) (5) and explain why the premium of one call is larger than that of the other call. (5)

B. Assume the company has a Euro payable 15M and they decide to hedge it with one of the two calls proposed in Solution 1. For each one of the two calls, calculate the maximum cost of the payable in AUD (After hedging). For this calculation, use the approximate exercise prices and, premium calculated in A and, assuming the call premium paid at maturity so that there is no time value of the premium.